At the Fool, we believe that in order to find good shares to invest in, one has to start with figuring out how strong a company’s business is. And to do so, we can turn to the Rule Maker framework outlined by Motley Fool Chief Executive Officer Tom Gardner in his book Rule Breakers, Rule Makers. The Rule-Maker Framework Here’s how the framework looks like: Is the company selling low priced, everyday items? How does the business’s gross margins look like? What about its net margins? Is the company’s sales growing? What about its cash to debt ratio? Is its Foolish…
At the Fool, we believe that in order to find good shares to invest in, one has to start with figuring out how strong a company’s business is.
And to do so, we can turn to the Rule Maker framework outlined by Motley Fool Chief Executive Officer Tom Gardner in his book Rule Breakers, Rule Makers.
The Rule-Maker Framework
Here’s how the framework looks like:
- Is the company selling low priced, everyday items?
- How does the business’s gross margins look like?
- What about its net margins?
- Is the company’s sales growing?
- What about its cash to debt ratio?
- Is its Foolish Flow Ratio (a gauge of how fast the business can bring in cash) strong?
- Lastly, what’s your level of familiarity and interest with the business?
Figuring out Petra Foods Limited
With that, let’s run chocolate confectionary owner Petra Foods Limited (SGX: P34) through the framework today. We will use figures from its financial year ended 31 December 2014 for this exercise.
You can read more about the company in here.
The following’s a quick rundown of how Petra Foods has fared against the Rule Maker framework (numbered in the same order as the seven criteria above):
- As an owner of branded chocolate confectionary products, Petra Foods is in a business with key traits that Tom likes – an affordable product with recurring customers.
- For 2014, Petra Foods reported a gross margin of 31.9%.
- For 2014, Petra Foods had $48.7 million in net profit, representing a net margin of 9.7%.
- Moving on to the topline, Petra Foods’ revenue has shrunk significantly since 2009. In all fairness, the company has been slowly refocusing its business around its branded consumer products (it used to own a cocoa ingredients supply business that was sold in 2013) and so, there is less we can take away from its track record of sales growth here.
- As of 31 December 2014, Petra Foods had $172 million in cash and equivalents, and $74 million in borrowings. This gives a cash to debt ratio of 2.3, which is above Tom’s desired figure of 1.5.
- As of 31 December 2014, Petra Foods had $172 million in cash and equivalents, $347.8 million in current assets, and $150 million in current liabilities. This gives a Foolish Flow ratio of 1.2 which is close to Tom’s preference for having the figure come in at 1 or below.
- It is hard to judge the level of interest for each individual, but the nature of Petra Foods’ products (chocolates!) is likely to be easy to follow for most investors.
Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.
With Petra Foods, we might see a company that’s in the midst of transitioning into a pure-play branded consumer products company.
The good thing is that the chocolate confectionary owner managed to earn a respectable net margin of 9.7% for each dollar of revenue in 2014. Petra Foods is also financially stable with a healthy cash to debt ratio. While its Foolish Flow ratio is not the best, suggesting that it may have some work to do to be consistently free cashflow positive, the figure’s not too bad either.
As a final note, it is important understand to that no one company is perfect.
With the characteristics defined above, the onus remains with the Foolish investor to decide if Petra Foods’s current share price provides an appropriate margin of safety and whether it fits into his or her portfolio.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.